Ten stocks from 2011 with the most dividend growth are the subject of this post.
I added each of these stocks to my 2011 Model Portfolio during
the period November 2010 through November 2011.
When I picked these stocks they had a minimal yield of 3%, a D/E ratio
no greater than 1 or within industry standards, earnings exceeded dividends in
their most recent quarter and dividends had increased over time. The portfolio was built to deliver solid,
ever increasing income in a buy and hold strategy.
I picked 52 stocks during that time, about one per
week. In this post I look at the ten
stocks with the most dividend growth.
·
Dividend yield and growth rate
·
Revenue growth rate
·
Debt to Equity ratio
·
Call option opportunity
TEN ABOVE AVERAGE DIVIDEND GROWTH STOCKS
The ten stocks discussed in this post are: ITW, GPC, WHG, WSO, GIS, HAS, RTN, NOC, LMT,
TRV. The table below presents their five-year
dividend growth rates. ITW delivered the
lowest growth rate at 52.78% and TRV the highest growth rate at 139.29%. Each of these stocks delivered solid, ever
increasing income so far.
DIVIDEND GROWTH STOCKS ARE EXPENSIVE
My first impression of these stocks is that they seem
expensive. One way to look at this is to
evaluate P/E ratio and 52 week high prices.
P/E ratio is the price of a stock dividend by the earnings.
Currently the P/E ratio of the S&P 500 is about 24. A low P/E ratio is consistent with a cheap
stock and a high P/E ratio is consistent with an expensive stock. High P/E ratios also have been linked with
growth stocks. Boring old income stocks
tend to carry lower P/E ratios. Look at
the P/E ratio of these ten stocks in the table below.
I am not surprised that many of these boring, income stocks
carry a higher P/E ratio than usual.
Where else can a financial advisor or money manager go to create solid,
ever increasing income for its retiree customers? Demand has driven up the price; driven up the
P/E ratio; and driven down yield.
Having lived through hyperinflation in the 80’s, followed by
the fabulous bond bull market since then, I have been waiting for interest
rates to normalize so I could build a portfolio of laddered 7% government
bonds.
As I am retired, I cannot wait for that to happen, so like
all retiree money managers, I have to find quality dividend stocks to fund my
lifestyle. Every one of us could buy now
and see the stock values retreat. Yet,
as long as our income continues to go up, our budgets should be balanced.
DIVIDEND YIELD AND GROWTH
Nine of the 10 stocks’ dividend yield is less than 3%. I am not surprised since I think these stocks
are a bit expensive. All stocks
delivered a recent quarterly dividend increase as expected but their most
recent dividend increased does not necessarily keep up with their historical dividend
increases. The most recent dividend hike
kept up with historical performance in only three of the ten stocks, ITW, WHG
and WSO. See the table below.
If dividend growth rates are slowing, I want to pick one
that is growing the dividend provided that the other fundamentals are solid. However, I place a bias on stocks that command
covered call income. Covered calls are
an excellent technique for sophisticated income investors to boost income from
a low yielding stock.
When I sell (also known as writing a call) a call, I want a
strike price that is at least 8% above my basis. If I am thinking of adding one of these
stocks and looking at a strike price that meets my need I would use the current
price as my basis. I like an expiration
date that is out far enough to get the next quarterly dividend but no more than
160 days. Moreover, since the point is to increase my income, I expect a call
premium of 1% of the strike price. These
trading metrics provide for a minimal 10% total return should my stock be
called away at the strike price.
Only one in ten of these stocks had a call I would consider
and that stock is Raytheon, RTN. Frankly, the expiration date is further out
(148 days from 6/23/2016) than I usually pick but this table illustrates the
income potential.
Insert Covered Call table for RTN
CURRENT FUNDAMENTALS
Nine of the 10 are solid stocks. Lockheed Martin, symbol LMT, has too much
debt. I am using D/E (debt to equity
ratio) and LMT has a D/E of 4.51.
Anything above 1 makes me nervous unless the industry always carries
high D/E ratios. General Mills, symbol
GIS has a D/E ratio above 1 (1.44) and above industry standard of .53 so I
would avoid both of these stocks on that basis. ITW also carries a D/E ratio above 1 but that is within industry standard.
If you have a choice, why not go for stock with a better balance
sheet. All the other stocks’ D/E ratios
are within the margin of safety.
Recent revenue growth is the final metric I applied to these
ten dividend income stocks. If you get
more revenue and earn more than you pay out in dividends, it is highly likely
the stock will continue to deliver solid, ever increasing income.
Revenues between 2014 and 2015 increased in five of the ten
stocks, in the others, revenues were flat or down. See the final table below.
Only one stock makes me want to own it since it has no debt,
the highest yield of the group, revenue growth and dividend growth and that
stock is Westwood Holdings Group, symbol WHG.
Westwood is an assets manager. We
do not know how the new FINRA fiduciary rule will affect their business. But on fundamentals, this is a good stock
to consider for the income producing portion of your portfolio. Earnings are coming up July 27, 2016 and you
may want to wait to hear the news. WHG’s 52-week price range is $41 to $63 so
at $55 you are buying about in the middle.
Ten over achieving dividend growth stocks for your
consideration.
M* MoneyMadam
Disclosure: Long GPC,
WHG, WSO
June 27, 2016 Update.
I wrote this article before Brexit.
I have added a table below that presents the performance of these 10
stocks using Friday June 24, 2016 closing prices.
